Real estate investing is an extremely popular form of investment and can provide both active and passive income, as well as portfolio diversification and tax advantages. Unfortunately, real estate investing can be tricky, and to be successful at it, you need to have an understanding of real estate and the real estate market you’re investing in.
Luckily for you, we’ve put together this guide on the basics of active real estate investing to start you off on the right foot. If you’re looking for information on passive real estate investing, take a look at our second guide in the series, the Basics of Passive Real Estate Investing.
What is Real Estate Investing?
Simply put, real estate investing is the purchase, lease or sale of land, homes, and commercial buildings for the purpose of earning money. Real estate investing is broken down into three types: residential, commercial and industrial.
Residential Real Estate
Although we typically think of residential real estate as single-family homes, there are actually many other housing types included in this category. Single-family homes, townhouses, condos, and multi-family homes are all considered residential real estate. Essentially, any building that is used for living and not working is residential real estate. If the property has more than four units however, it will be considered commercial real estate.
Commercial Real Estate
Commercial real estate is the most straightforward category of real estate investing. That’s because put simply, commercial real estate is any property that is used for business. Examples of commercial real estate are offices, retail spaces, or residential properties with more than four units.
Industrial Real Estate
A small but mighty category of real estate investing, industrial real estate consists of anything that is used for an industrial business purpose. Common examples of this are shipping and storage warehouses, factories, and power plants.
How to Make Money with Active Real Estate Investing
Purchasing real estate gives you three main ways to make money: rent, appreciation, and interest from loans.
Rent is the most common form of income from real estate investing. The steady stream of rental payments from homes, apartments, commercial buildings, and warehouses can add money to your bank account with minimal effort on your part. To keep the entirety of the rent payment, you will want to act as the landlord, knowing that you will be responsible for fixing repairs or any other issues that come up.
If you’d rather avoid that responsibility, you might want to consider hiring a property management company. While this will take away the pressure of being a landlord, you will have to share a certain percentage of the rent payments with the management company.
Appreciation allows you to benefit from the sale of your investment, but you won’t gain the money overnight. Appreciation is the increase in property value over time, meaning if you purchased a property for a $100,000 five years ago and the area your property is in has become more popular, you can sell it for $130,000 as the value of the property has gone up. While appreciation will give you large revenue returns, they will be in a lump sum, and the returns are not always guaranteed.
One thing to keep in mind with properties that you’re hoping will appreciate is that you’re still responsible for maintaining the property before you sell it, so you will still have to invest time and money into the property. You might consider purchasing a property, renting it out for a steady stream of income, and then selling it for appreciation once the property value goes up.
Interest from Loans
This type of real estate is a little trickier for individuals and is more often used by private equity firms. Essentially, the investor will loan money to a real estate developer (often referred to as debt), which the developer will have to pay back with interest. The income the investor will garner comes from the interest on the loan.
There are a few types of loan investment: senior debt, junior debt, and mezzanine debt. The loans can also be secured or unsecured. Secured loans will protect the investor in case of a foreclosure or project shutdown.
Active Real Estate Investing
No matter your budget, available time or commitment level, there is a real estate investment opportunity for you. There are two main categories of real estate investing: active and passive investments. In this article, we will explain active real estate investing; if you’re looking for information on passive real estate investing, check out part two of our guide!
Frequently referred to as DIY real estate investing, active investments require large time and commitment levels. The most successful active real estate investors have a deep understanding of the real estate market and practice real estate investing full-time. There are three main types of active real estate investing: house-flipping, rental properties, and Airbnb.
HGTV has made house-flipping more popular than ever with their shows that follow full-time house flippers across the country. Unfortunately, house-flipping isn’t always as glamorous as it seems on TV. House-flipping is the process of purchasing a home for a good price and making renovations and improving the home’s value in order to sell it at a higher price.
While that may sound easy, the investor really needs to understand the real estate market to know which houses to purchase and what improvements to make. In house-flipping, there is a risk of being upside down on the house when investors make too many expensive upgrades and their investment spent is more than the home is valued at.
A more long-term investment than house-flipping, rental properties will provide a steady stream of income—but not without time investment on your part. Often, the most difficult part of managing a rental property is finding tenants for the property. Once you find tenants interested, you will have to evaluate their income, background, and decide if you’re comfortable with them living in your property.
If you decide to move forward with leasing your property to the interested tenants, you will need to engage a lawyer to draw up a solid lease agreement to protect you from being responsible for damages. You will also need to arrange rent payments, property maintenance, and evictions if necessary.
Like we mentioned above, you can hire a real estate property management company to handle things like rent payments and maintenance, but you will have to split your rental income with them.
A fairly new form of real estate investing, Airbnbs allow hopeful real estate investors to dip their toes in the investment waters. Airbnb clients are looking for short-term rentals in private homes. Sometimes they’re looking for an entire private house or apartment, while other times they’re just looking for a bedroom.
Many real estate investors purchase properties with their only goal being to rent it out via Airbnb. There are a lot of positive aspects of working with Airbnb. Not only do they handle the booking of the property, but they also have customer service to help both renter and guest if anything were to go astray.
Oftentimes Airbnbs can bring in just as much income as a full-time rental property because you’re renting at a per-night fee as opposed to a per-month fee. If you have your property booked the entire month with different Airbnb guests, you could easily double the money you would make if you rented to a single tenant.
Of course, there is no guarantee that guests will book your Airbnb and some homeowners associations and apartment management companies forbid Airbnb guests. Before jumping into Airbnb full time, do you research to decide what amenities guest’s in your area are looking for and ensure that you won’t be breaking any rules by listing your property on Airbnb.
Get Your Real Estate License
As you can clearly see, active real estate investing requires a lot of real estate knowledge. Luckily for you, we offer a Real Estate Pre-License course to educate you on the basics of real estate and prepare you (if you’d like) to become a licensed real estate agent. Start your real estate training and investing today!